Calculating cost basis for stocks bought and sold over multiple transactions - FIFO vs average cost method confusion

Thanks for clarifying! So just to make sure I understand correctly, since I didn't specify which shares I was selling at the time, I have to use FIFO? There's no way to use the average cost method? Also, do you know how I would report this on my tax forms? Do I just put the total gain on Schedule D, or do I need to break it down somehow?

You're correct - since you didn't specify which shares at the time of sale, you'll need to use FIFO. The average cost method is only allowed for mutual funds and certain dividend reinvestment plans, not for individual stocks. For reporting, you'll list each sale on Form 8949. Since your 1099-B doesn't include cost basis, you'll check Box C (short-term) or Box F (long-term) at the top of the form. List each sale transaction, including dates acquired, dates sold, proceeds, and your calculated cost basis. Then transfer the totals to Schedule D. Make sure to keep all your transaction records and calculations in case the IRS has questions.

Does taxr.ai work with crypto transactions too? I've got both stocks and crypto and the crypto part is especially confusing with all the different exchanges.

How accurate is it compared to the paid tax software packages? I've been using TurboTax but it's getting expensive and doesn't handle complex stock situations well without upgrading to their premium package.

Yes, taxr.ai absolutely works with crypto transactions! It supports imports from all major crypto exchanges and can handle even complex situations like staking rewards, mining income, and token swaps. It applies the same FIFO/LIFO logic to crypto transactions and even accounts for wash sale rules when applicable. For accuracy, I found it more detailed than TurboTax for investment situations. It breaks down each transaction with far more granularity than TurboTax's basic investment module. The best part is that it shows you exactly how it calculated everything, so you can verify the math. I actually found a mistake in my previous year's TurboTax calculations after using taxr.ai and had to file an amendment to get money back.

How does this actually work? Does it just call the IRS for you? Couldn't I just keep calling myself until I get through?

This sounds like a scam. You're telling me some random service can magically get through to the IRS when millions of people can't? Yeah right. The IRS phone system is broken by design and no app is going to fix that.

It doesn't just call for you - they use a smart system that navigates the IRS phone tree and waits on hold in your place. When they reach a live agent, you get a call back to connect with the agent. It's entirely different from just calling repeatedly yourself because their system is optimized to work with the IRS phone system patterns. I was skeptical too until I tried it. The difference is they have technology that keeps your place in line even during disconnects and can call back at optimal times when hold times are shorter. I spent literal days trying to get through on my own before using this. It's basically like having someone wait in a physical line for you, then texting when they get to the front so you can take their place.

Oh wow, I didn't even think about dividend reinvestments! I do have DRIP turned on for some of my positions. How exactly do I account for all those tiny purchases? I must have dozens of them throughout the year at different prices.

For dividend reinvestments, you'll need to treat each reinvestment as a separate purchase at the price on the reinvestment date. I'd recommend downloading a complete transaction history from your broker that includes all reinvestments. Then you apply the same FIFO method - if you sell shares, you sell the oldest ones first, including any fractional shares from reinvestments. If you're doing this manually, create a spreadsheet tracking each purchase (including reinvestments) with date, number of shares, and price. When you sell, start removing shares from the top of your list (oldest first) until you've accounted for all shares sold. The sum of those purchase prices becomes your cost basis. It's tedious but necessary to avoid problems with the IRS.

Yes, wash sales absolutely affect your cost basis! When you have a wash sale (selling at a loss and buying substantially identical securities within 30 days before or after), the disallowed loss amount gets added to the cost basis of the replacement shares. So if you sold Tesla at a $500 loss in December and bought back in January, that $500 loss gets added to the cost basis of your January purchase. When you eventually sell those shares, your higher cost basis will reduce your taxable gain (or increase your loss).

This is super helpful, thank you! I didn't realize Publication 550 had specific examples - I'll definitely check that out. You're right about double-checking the broker info too. I just logged into my account portal and found some additional transaction details that weren't on the mailed 1099-B. One follow-up question though - when you mention "specific identification" for future trades, do you literally have to tell your broker "I want to sell the shares I bought on [specific date]" when you place the sell order? Or is there a way to set this up as a default method with most brokers? I'm definitely going to be more organized about this going forward. The manual spreadsheet method is teaching me a lot, but I can see how this would become unmanageable with more frequent trading.

Yes, with specific identification you need to specify which exact shares you want to sell at the time of the trade. Most brokers allow you to do this either by calling them directly or through their online platform if they have an advanced trading interface. For example, with Fidelity or Schwab, when you place a sell order online, there's usually an option to select "specific shares" or "tax lots" where you can choose which purchase date/price you want to sell from. Some brokers let you set a default method (like FIFO, LIFO, or "tax-efficient") but the key is that you have to make the election before the trade settles. The important thing is that you can't change your mind after the fact - whatever method you use (or don't specify) at the time of sale is what you're stuck with for tax purposes. So if you want maximum flexibility, it's worth learning your broker's specific identification process now rather than during tax season!

This is such great advice about getting professional help! I'm actually in a very similar situation to the original poster - first time dealing with stock taxes and feeling completely overwhelmed by all the calculations. The point about holding periods is especially helpful because I hadn't even thought about how FIFO affects whether my gains are short-term or long-term. If I'm selling my oldest shares first, some might be long-term while others are short-term depending on when I bought them, right? I think I'm going to take your suggestion about finding a CPA who does review-only services. Do you have any tips on finding someone who specializes in investment taxation? I've been doing my own taxes with software for years, but this stock situation is way beyond what I'm comfortable handling alone. Also, did the CPA help you set up a better tracking system, or did you end up using one of the automated tools that others mentioned in this thread?

You're absolutely right about the holding period complexity with FIFO! When you sell shares using FIFO, each portion of your sale could have a different holding period. So if you bought shares in January 2023 and March 2024, then sold some in February 2024, the January shares would be long-term but the March shares would be short-term. For finding a good CPA, I'd recommend checking with your state's CPA society for referrals to tax professionals who specialize in investments. You can also ask for recommendations on local investing forums or check if any CPAs in your area advertise investment tax specialization. My CPA actually recommended a hybrid approach - she helped me set up a proper Excel template with formulas that automatically calculate FIFO cost basis and holding periods, then suggested I try one of the automated tools mentioned here (like taxr.ai) for next year to compare results. The manual system works great as a backup and helps me understand what's happening, but the automation saves tons of time for complex situations. The review-only service cost me $150-200 but saved me from potentially costly mistakes. Plus, now I feel much more confident about handling this myself going forward.

Great question about the merger situation! This is definitely one of the more complex scenarios. For a cash-and-stock merger, you'll need to allocate your original cost basis between the cash portion (taxable) and the new shares received (which carry over basis). The allocation is typically based on the fair market values at the time of the merger. So if you received $50 cash and $100 worth of new company stock, you'd allocate 1/3 of your original cost basis to the cash portion (taxable gain/loss) and 2/3 to the new shares (deferred until you sell them). Your broker should have provided a Form 1099-B or similar documentation explaining the tax treatment of the merger, including the allocation percentages. If not, you might need to look up the merger details from the companies involved or consult a tax professional, as these calculations can get quite complex. I totally agree about keeping a running log - that's such a smart approach! I wish I had started doing that from the beginning instead of trying to reconstruct everything at tax time.

This is such valuable information about broker cost basis services! I had no idea that some brokers offered historical reconstruction for a fee. That $75 sounds like a bargain compared to the time and stress of doing it manually, especially with all the corporate actions you mentioned. Your point about wash sales across different accounts is really important too - I definitely wouldn't have thought about that! Does this mean if I have accounts with multiple brokers, I need to track wash sales manually across all of them? That sounds like it could get really complicated to monitor. Also, for anyone following this thread, I wanted to mention that I ended up trying the taxr.ai tool that @Angelica Smith recommended earlier, and it actually caught a wash sale situation I had missed in my manual calculations. It s'been a lifesaver for someone like me who s'new to investment taxes and probably would have made costly mistakes on my own. The combination of getting professional help for the first year like (you suggested plus) using better tools going forward seems like the smart approach. Thanks for sharing your experience with the Fidelity service - I m'going to look into whether my broker offers something similar!

@Yara Elias I m'so glad this thread helped clarify things for you! I was in the exact same position when I started - completely overwhelmed and avoiding the whole mess. Your systematic approach sounds perfect. One small addition to your takeaways: don t'forget to save screenshots or PDFs of all your transaction histories before you start calculating. I learned this lesson when my broker s'website went down right in the middle of my cost basis calculations and I temporarily lost access to some of my historical data. Also, if you re'going to try the manual approach first which (I think is smart for understanding the mechanics ,)consider starting with your simplest positions first. Build confidence with stocks where you only bought once or twice before tackling the more complex ones with multiple purchases and dividend reinvestments. The automated tools are great for verification, but understanding the underlying calculations yourself really helps when you need to explain your numbers to the IRS or answer questions from a tax preparer. Good luck with your calculations - you ve'got this!

Thank you so much for mentioning Publication 550! As someone completely new to investment taxes, having an official IRS resource with step-by-step examples is exactly what I needed. I was trying to piece together information from random websites and getting more confused. Your point about stock splits is particularly helpful - I actually do have one position that split 2-for-1 during the year and I had no idea I needed to adjust both the share count and price for my older purchases. That could have been a major error in my calculations! The three-column tracking system you described sounds much simpler than the complex spreadsheet I was trying to build. Sometimes the straightforward approach really is the best. I'm going to download Publication 550 right now and start working through their examples before tackling my own situation. It's reassuring to hear that doing it manually once helps with organization going forward. Even though this feels overwhelming now, I'm sure I'll be grateful for understanding the underlying mechanics rather than just relying on automated tools without knowing if they're correct.

Welcome to the community, Liam! Your situation sounds very manageable for a first-timer. With only 5-10 transactions, I'd actually recommend starting with the manual Publication 550 approach first. Here's why: 1. It'll teach you the fundamentals so you can spot-check any automated tools later 2. With that few transactions, it's totally doable in a weekend 3. You'll understand exactly how FIFO works and why certain shares get selected 4. If you make a mistake, it's easier to catch and fix with a small number of transactions Once you've worked through it manually and understand the logic, then try one of the automated tools like taxr.ai on the same data to verify your results match. That gives you the best of both worlds - education plus verification. The key things to remember for your first year: stick with FIFO since you didn't specify shares at sale time, include any dividend reinvestments as separate purchases, and keep detailed records of your calculations. Don't overthink it - the IRS just wants to see that you used a consistent, reasonable method and can support your numbers. You've got this! Start with Publication 550 and feel free to ask questions as you work through it.

Thanks for sharing your experience, Millie! Your point about checking the broker's online portal is so important - I almost missed some crucial transaction details that weren't on my printed 1099-B. I'm curious about something you mentioned regarding dividend reinvestments. When you found those additional records, did you have to go back and recalculate your entire cost basis using FIFO? I'm worried I might have missed some of these smaller transactions and am wondering how much of a difference they typically make in the final numbers. Also, your comment about tracking purchase dates for short-term vs long-term treatment is really helpful. I hadn't fully considered how FIFO affects the holding period calculations when you have multiple purchase dates. Did you end up with a mix of short-term and long-term gains on your sales, or were most of your positions held long enough to qualify for long-term treatment? The organization aspect is definitely something I need to work on going forward. This manual process is teaching me so much about what I should have been tracking all along!

Yes, I did have to recalculate everything once I found those dividend reinvestment records! In my case, it was about 15-20 small DRIP transactions throughout the year that I had completely overlooked. While each individual reinvestment was small (usually $10-50), they added up to a few hundred dollars in additional cost basis that significantly reduced my taxable gain. The tricky part was that these reinvestments happened at different dates and prices, so I had to insert them into my FIFO queue in chronological order. It completely changed which shares were considered "sold first" when I applied the FIFO method. I ended up using a spreadsheet where I sorted all purchases (including reinvestments) by date, then worked down the list as I accounted for each sale. For the holding periods, I did end up with a mix! Some of my Tesla sales were long-term because I was selling shares I bought over a year ago, but other portions of the same sale were short-term because I had made additional purchases more recently. You have to track each lot separately for both cost basis AND holding period purposes. My advice would be to download a complete transaction history that includes all corporate actions, dividends, and reinvestments before you start calculating. It's much easier to be thorough upfront than to discover missing transactions halfway through your calculations!

This is such a helpful discussion! I'm actually in a very similar situation to the original poster - first time dealing with stock taxes and feeling overwhelmed by all the cost basis calculations. Reading through everyone's experiences has been incredibly reassuring that I'm not the only one struggling with this. @Aisha Abdullah your point about downloading a complete transaction history upfront is so smart - I was just working off my printed 1099-B and probably would have missed dividend reinvestments too. I m'going to log into my broker s'portal right now and get the full transaction export before I start any calculations. The mix of short-term and long-term gains from the same stock position is something I hadn t'considered either. It makes sense with FIFO that you d'be selling your oldest shares first, but tracking the holding periods for each lot separately seems like it could get complicated quickly. I think I m'going to follow the advice from earlier in this thread and start with the Publication 550 manual approach to understand the mechanics, then maybe use one of the automated tools to verify my work. With everyone s'guidance here, this feels much more manageable than it did when I first started reading about cost basis calculations! Thanks to everyone for sharing such detailed experiences - this community is amazing for helping newcomers navigate these complex tax situations.

This is exactly the kind of practical guidance I was hoping to find! Your spreadsheet approach with Date, Shares, Price, and Total Cost columns sounds so much clearer than trying to keep track of everything in my head. I've been staring at my transaction history feeling completely overwhelmed, but breaking it down systematically like you described makes it feel manageable. The point about different holding periods within the same sale is really important - I hadn't fully grasped that FIFO means I could have both short-term and long-term portions of a single stock sale depending on when I originally bought each lot. That definitely complicates the tax calculation, but at least now I know to watch for it. I'm definitely going to check my broker's online portal for additional details before I start calculating. Based on what others have shared here, it sounds like dividend reinvestments and other corporate actions are commonly missed when just working from the printed 1099-B. Thanks for the encouragement about it getting easier with experience! As a newcomer to investment taxes, it's reassuring to hear from someone who successfully navigated this same confusion. I'm feeling much more confident about tackling this systematically now.